Oil Slips as OPEC Deal Seen Leading to Potential Shale Surge

Oil retreated amid worries that OPEC’s deal to extend production cutbacks may take U.S. shale activity to a whole new level.

Futures tumbled as much as 1.6 percent in New York. OPEC and partners including Russia last week agreed to keep cutting output through the end of next year. At the same time, North American explorers probably will boost spending by 20 percent in 2018, according to an Evercore ISI survey of industry budget trends.

“It’s been a steady climb on the production side here in the U.S., which continues to eat away at OPEC’s hopes for balancing this market,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by telephone. “They are sowing the seeds for the deal unraveling just because the way it’s promoting shale output.”

The slide comes after oil jumped about a fifth from early September as investors geared up for last week’s decision by the Organization of Petroleum Exporting Countries and its allies. The producers will maintain cuts until global supply meets demand, Saudi Arabia’s Energy Minister Khalid Al-Falih said. OPEC’s output in November dropped to a six-month low, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

Shale Surge

But the danger is U.S. shale activity may surge, undermining the OPEC reductions. The U.S. oil rig count was already at the highest level since September last week, according to Baker Hughes data released Friday, and U.S. output was at a record high in the latest weekly government statistics.

West Texas Intermediate for January delivery fell 72 cents to $57.64 a barrel at 1:18 p.m. on the New York Mercantile Exchange. Total volume traded was about 30 percent below the 100-day average.

Brent for February settlement slid 93 cents to $62.80 on the London-based ICE Futures Europe exchange. The global benchmark crude was at a premium of $5.16 to February WTI.

Pioneer Natural Resources Co., one of the biggest U.S. independent drillers, is planning to raise output to more than 1 million barrels of oil equivalent a day by 2026 from about 300,000 a day this quarter, Chief Financial Officer Richard Dealy reiterated last week at a conference in Singapore.

Citigroup Inc. forecasts that the market will be balanced in 2018 but is bearish for 2019, with a Brent forecast of $49 a barrel as supplies return from OPEC and increase from Brazil and Russia.

A rising dollar also pushed prices lower Monday. The Bloomberg Dollar Spot Index, a gauge of the dollar against 10 major peers, increased as much as 0.5 percent. A stronger greenback typically reduces investors’ interest in commodities.

“Oil is really suffering at the moment from having a strong run and momentum trades are getting negatively impacted,” Atul Lele, chief investment officer at Nassau, Bahamas-based Deltec International Group, said by telephone. The “slowing U.S. dollar liquidity environment” is also depressing oil prices, he said.